Chapter 10: Budgeting and Sustainability

10.A – Introduction

Attending conferences on sustainability organized for government officials is often a very uplifting experience. Keynote speakers typically come from a variety of backgrounds — including business, science, the mass media and academia. It is clear that the sustainability tent is a large one indeed, and includes ample room for private-public sector partnerships between emerging industries and government; eager and informed citizen stakeholders and administrators can frequently be found working in cooperative enterprises of one type or another. While nearly always concluding with warnings for the challenges to be faced along the path ahead, the keynote speakers usually offer the promise of a responsible and prosperous future if all reforms of consumption and production practices and processes are achieved as expected. One generally walks away from these gatherings better informed, more deeply concerned, somewhat optimistic, and highly motivated to contribute to achieving the goal of sustainability for our progeny.

The mood tends to change a bit, however, when one faces the realities of budgeting for sustainability; it is the case that changes away from “business as usual” is generally more expensive than sticking with the status quo, and nearly always requires a substantial financial commitment to be maintained over a long timeframe. All too often, that sense of cautious optimism inspired by keynote speakers at sustainability conferences dissipates when the reality of getting through the end of the fiscal period sets in. Those setting the budget have to somehow justify monies requested for the year ahead. A decade ago, the state and local government budget horizon looked rather bright. The technological boom associated with computers and information processing produced needed new revenue in the 1990s. In the first decade of the 21st century, however, a much darker economic scenario looms.1 The continuing cost of wars against terrorism abroad, a seriously faltering housing market, a slowdown in economic growth, unresolved healthcare system problems and pension system failures all translate into forecasts for weak revenue streams coming to state and local governments for an extended period. Energy markets have tightened as peak oil predictions look more convincing, and inflationary trends combined with a weakening currency lead many fiscal analysts to anticipate constrained public sector budgets at the state and local levels. The need to prepare for future disasters – either manmade of the type the Department of Homeland Security seeks to prevent or the natural phenomena that global climate change may well occasion – is yet another significant constraint facing budgeters in state and local government over the course of the coming decade.

Learning Objectives

This chapter will:

discuss how the typical state and local budget process works including the various actors and institutions involved.

discuss intergovernmental sources of revenues for transportation, education, public health and many more state and local services.

examine historical state and local expenditure patterns.

present various approaches for budget reform, which have been advocated for the state and local government.

10.B – Why do we budget? How does the typical budget process work?

Simply put, we “budget” (both a noun and a verb) because we nearly always have limited financial resources and multiple demands on those resources that exceed actual cash balances, current assets or expected cash and financial assets available to us. Public budgeting is the process by which elected and appointed officials, acting in the interest of the governed, determine methods of collecting government resources and securing assets through forms of taxation or appropriation (e.g., the holding of public lands, forests, surface waters, etc.) and then allocate those financial and associated resources on priorities determined by the democratic political process.

The politics of budgeting entail arriving at outcomes where some priorities are deemed more important than others. The result might be that revenues collected are, as a result of budgeting choices, directed to certain priorities while other noteworthy issues receive less financial support – or even no support at all. Human nature being such that it is, hardly anyone relishes the thought of losing out in a budgetary process and virtually nobody who thinks that a priority is worthy of public funding would be pleased to discover that the majority of individuals making budgeting decisions think otherwise. The common result of the periodic budgeting process is that it creates great angst while it is going on, and the results of the process often are that conflict is sewn for the next round of budget allocations in each succeeding round of budgeting.

Most proponents of particular state and local budget priorities believe that becoming a funded priority of government is more likely if budget decision makers (elected and appointed officials) also value a particular priority and are acquainted with the methods for accommodating a budget request. The budgeting process is iterative, meaning existing priorities are continually “explained” and the methods for securing funding have become increasingly sophisticated over time. In the case of pursuing sustainable governance, priorities and budgeting practices have shifted somewhat. Efforts on the part of some powerful advocates to promote sustainability are adding significantly to the traditional challenges of public budgeting. Budgeting is, as a consequence, an increasingly complex process in American state and local government.

In most American state and local governments, budgeting occurs either annually or biannually. Items established in previous budget cycles, if they are politically popular, are more likely to have a higher priority and gain funding than are newer items seeking a piece of the proverbial “budget pie.” Unfortunately, many of the new budgetary items involving sustainable governance and the promotion of resilient communities are too new to seem a priority for seasoned budget makers. This harsh reality means that the task facing sustainability advocates is a challenging one because new ideas must be promoted at the cost of established priorities and they must gain broad favor in order to receive the lifeblood of public financial investment.

10.C – Generic Budgeting Process

As a list of major steps taken in the process of building a state and local government budget, the universal budget process appears deceptively simple:

1. Preparation of revenue and expenditure estimates takes place.

2. An executive budget is compiled and submitted to a legislative body.

3. The legislative body deliberates and issues budgetary approval.

4. The executive signs the legislative enactment containing the budget(s) into law.

5. Budget execution occurs with the allocation of resources to public agencies.

10.C.I – The Preparation of Budget Estimates

The beginning of a budget cycle generally requires the input from government agencies on the financial resources they expect to need for the next budget cycle. Similarly, a process is generally in place whereby a unit of state and local government prepares revenue estimates for the coming year or biennium. The agency expenditure estimates are shaped by many considerations, including the following:

Existing statutes and rules: Agencies consider the statutory requirements that they are required to accomplish. State and local elected officials often develop new policies or adjust older policies through new or revised legislation, then work to estimate the costs associated with these new policies and programs.

Statutes and rule additions and changes: Agencies consider the costs of implementing and enforcing statutes through administrative rules and other policies. Agency interpretations of the meaning of statutes — frequently subject to the accession of elected leaders and the courts — will affect the expenditure estimates associated with implementation and goal accomplishment.

Federalism Impacts: State and local government agencies often must consider the statutory and administrative rule requirements emanating from other levels of government. Local county and municipal governments are often constrained by state and national laws, rules, and resource provision; states are highly responsive to national politics and federal policy.

Demographics: Many budgetary priorities are a function of population — the numbers and types of people who live in a jurisdiction currently and who are expected to live there in the future. As demographic changes occur (e.g., school-aged population, percentage of population requiring public health services, etc.), the public expenditures associated with accomplishing certain priorities change as a result.

Agency-related issues: Public agencies at the state and local government level must consider the changing role and nature of their personnel and their operations (e.g., the computerization of records, the adoption of e-government links to the public, etc.). Agency anticipated expenditures often rise or fall independently of statutory additions or changes.

After agency estimates have been drawn up, these are typically submitted to an elective executive leader. At the state level, the leader in question is the state governor; at the local level, it may be the county commissioners, the mayor or the city manager.

10.C.II – Executive budget compiled and submitted to legislative body

The political executive is powerful in the budgetary process, without exception. Executives in state or local government review, alter, and compile all agency budgets before submitting their own budget for legislative consideration. Frequently, the executive has offered agencies some guidance in the preparation of their estimates, indicating the executive’s priorities as well as expressing expectations about resource availability for the budget derived from the revenue forecast as a whole, and often for constituent parts of the budget as well. In many cases state and local government agencies request resources that do not line up fully with executive expectations or preferences; often adjustments are made prior to the submission of the budget to the legislative body in question which reflect the executive’s preferences and priorities.

The politically responsible, elected executive authority must take into careful consideration the priorities of different levels of government, particularly when those levels of government mandate certain expenditures. Mandates may come with funding to support a priority or may be “unfunded” — meaning that the state and/or local government must carry the cost of complying with the mandate. For example, Congress might require all public agencies to provide easy access to the disabled in all public buildings; if funds are set aside for the reimbursement of costs incurred, this would be a funded mandate. If, on the other hand, few if any such funds are provide this would be an unfunded mandate.

In addition to mandates, the executive budget must also consider that certain public expenditures are directly related to entitlement programs. Entitlements require that government pay for certain individual needs of a beneficiary meeting a set of prerequisites. For example, indigent people without private assets qualify for state medical benefits — usually in the form of Medicaid. The high costs incurred in meeting mandated and entitlement expenditures limit resources for the introduction of new, cutting-edge policies related to sustainable communities and citizen engaged governance.

At the state and local level, the political executive usually enjoys the services of a staff budget officer and budget office, and this office is highly responsive to the political executive and his/her own set of priorities. This executive staff office works with agency budget personnel to make adjustments in the expenditure estimates sent from the agencies, and it ultimately submits a compiled budget request to a legislative body for its consideration. The executive budget is usually submitted as a balanced budget, with a discussion of expected revenues derived from the revenue forecast and a detailed accounting of expenditure priorities recommended for adoption.

10.C.III – Legislative body deliberations and budget approval

Both a fiscal management document AND a political document, the executive’s budget reflects the current administration’s ideology and establishes priorities along those lines. State and local legislative (deliberative) bodies are composed of other elected representatives with a wide range of values and issue priorities. In many cases, the executive branch and the majority of legislators are from different political parties, a common situation slowing down the budget process. A governor, for instance, may create a budget built around increases in tax revenues through tax rate adjustments, while a majority of the state legislature is opposed to increasing tax rates. In such a case, the legislature would decline to support the requested level of spending.

The result of these differences is a budget “deconstruction” (significant reconfiguration), after which an entirely new budget is created through the legislative process. Legislatures usually conduct their budgetary business through an elaborate system of subcommittees, whose work is then submitted to the principal budgetary appropriations committee. Through a combination of the subcommittees and the legislative body, the process of establishing budgetary priorities takes shape. Administrative research offices associated with the legislature, as well as the personal staff of legislators, work to coordinate the process and to offer information about various preferences and priorities, and the expected relative costs. In the spirit of institutional checks and balances, revenue analyses are conducted by legislative research offices independently of executive research work.

Eventually, the appropriations committee’s work on the budget is compiled into a unified budget document that is discussed, amended, and eventually passed by the legislative body. The legislative budget is then subject to approval or rejection by the political executive. Potentially, the budget could continue to revert to the legislative body until it either overrides the wishes of the political executive or the political executive approves the budget. In most states and in many local government jurisdictions the executive is permitted to exercise a “line-item veto” over particular budgetary items for some period of time (30 to 60 days, generally), but this power is used sparingly where it is given to the governor, commissioner or mayor.

10.C.IV – Budget execution

Following budget approval, budget instructions are sent to the agencies that will execute its provisions. Budget instructions are usually rather detailed accounts of the goals and priorities of the agency — relating back both to statutory requirements and county/municipal ordinances. Budget instructions and “fiscal notes” may include expenditure rates and goals, as well as the borrowing authority permitted for agencies. Borrowing authority relates to an agency’s capacity to enter into loan agreements for need resources. Some public agencies may be permitted to issue government bonds as a method of gaining resources. Loans and bonds ultimately involve a promise of repayment of monies to a lender or bondholder, as well some amount of interest on principal. This aspect of public budgets is particularly important where separate operations and capital budgets are prepared. Capital projects frequently entail public borrowing, while operations budgets seldom do so.

Budget execution requires that agencies submit regular and detailed financial statements and reports to political executives and to the legislature, demonstrating that expenditures comply with established policy priorities. If fiscal resources from another level of government come in the form of a grant, then budget execution may also include regular reports to granting agencies. At times, the agency’s expenditures will exceed the amount budgeted to it. In the executive phase, agency budget administrators promptly alert political executives and legislators of possible shortfalls in needed resources. This relatively rare event occurs when there are either unanticipated problems (e.g., a natural disaster) or a serious breakdown of administrative processes (e.g., the Enron energy price scandal), and can result in mandated budget cuts or the identification of other sources of resources through new or increased fees, through tax rate enhancements, or through the sale of public assets.

10.C.V – Post-Audit

At the end of the budget cycle, public agencies are held accountable for their spending actions. The system of accountability that is used in state and local government involves either an independent or in-agency audit of the financial records of agencies. The purpose behind the audit is to ensure that public funds were spent in accordance with the goals and priorities intended, and to determine if any resources were misused or wasted in the process of carrying out the people’s business. If an audit is positive, the fiscally responsible agency might benefit by finding its budget requests funded during in the next budget cycle. Conversely, shoddy record keeping and poor financial expenditure choices might negatively impact an agency and the provision of public funds for its priorities.

10.D – Sustainable Budgeting and Sources of Revenue

State and local governments are the bedrock of the U.S. federal system. The budgetary decisions made at these levels of government have a tremendous influence on the lives of citizens, community organizations and businesses. For example, some areas affected by state and local budgeting include lifestyle choices and living arrangements; spending patterns; business development or relocation. In order to attract citizens and businesses, states and local governments must contribute to the development of a welcoming, rewarding, and sustainable economic environment. New residents wishing to settle down and raise families, building their personal and professional lives in a place where they feel secure, often need the assurance of a lasting commitment on the part of government and the nonprofit and private sectors where they wish to reside. In many ways commitment is a key element in sustainability. Commitment to a secure quality of life in a specific place on the part of the public, nonprofit and private sectors often requires dedicated and persistent revenue investment in sustainable governance and enterprise support.

In a sense, revenue collected from taxpayers represents a commitment on the part of citizens to sustainability: commitment, after all, is a two-way street of mutual obligation. Most satisfying to community members is the view that money being paid to the government is fair or equitable. Likewise, revenue collected must be steady and predictable so that government can build budgets that focus on meeting the commitment of sustainability. Agreement on equitability and predictability, however, is a major challenge to state and local revenue collection systems, and both equitability and predictability are frequently the source of public dissatisfaction.

Taken in combination, state governments collect approximately one half trillion dollars per year in revenue. This revenue is collected in a variety of ways, to include the following typical categories of state receipts:

Commonly Recognized Taxes

Sales and gross receipts taxes

Personal income taxes

License fees

Corporate income taxes

Property taxes

Severance taxes

Other taxes

Death taxes

Gift taxes

Stock and documentary transfer taxes

10.D.I – Sales and gross receipts taxes

Sales taxes are those taxes paid on everything sold in retail transactions ranging from the clothing to food. Forty-five states and the District of Columbia impose sales taxes. Each state has the authority to set its own sales tax rate. In most American states unprepared food items are not subject to a sales tax: only five states make unprepared food subject to sales tax, with Tennessee imposing the highest tax rate on unprepared food (six percent). Taxing unprepared food is often thought to impose a higher cost on low-income individuals and families, and this type of tax can be viewed as unfair or inequitable as a consequence.

Sales taxes fall within the general category of excise taxes — these are taxes related to consumer consumption behavior. Beyond sales taxes, three other commonly known forms of excise taxes are motor fuel taxes, cigarette taxes, and distilled spirits taxes. Motor fuel taxes generally are used to fund road construction and road and bridge maintenance. Cigarette taxes are used generally by state governments to fund public health and education programs. Tobacco product taxes are potentially inequitable, given that smokers are commonly from lower income brackets. Nevertheless, it is thought that by increasing the cost to smokers through high excise taxes the state can cause demand for tobacco products to decline, likely leading to improved community health and economic sustainability. Nearly all states have cigarette and distilled spirits taxes (so-called “sin” taxes), but the rates vary significantly from state to state.

10.D.II – Personal Income Tax

One common method of collecting state and local revenue — state-level individual income tax — is used in 43 states and the District of Columbia. According to another Tax Foundation study on income taxes:3

“Individual income taxes are a major source of state government revenue, accounting for 36% of state tax collections.”

“Forty-three states levy individual income taxes. Forty-one tax wage and salary income, while two states — New Hampshire and Tennessee —exclusively tax dividend and interest income. Seven states levy no income tax at all.”

“Of those states taxing wages, eight have single-rate tax structures, with one rate applying to all taxable income. Conversely, 33 states levy graduated-rate income taxes, with the number of brackets varying widely by state. California and Missouri each have ten brackets, the most in the country.”

“States’ approaches to income taxes vary in other details as well. Some states double their single-bracket widths for married filers to avoid the “marriage penalty.” Some states index tax brackets, exemptions, and deductions for inflation; many others do not. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all.”

The lowest bracket income tax rate is found in Iowa (0.36%), and the highest bracket rate is found in Oregon (9.9%). Six states have a flat rate for state income taxes. The highest flat rate state income tax is in Massachusetts (5.1%). As a whole, state personal income taxes are the second largest source of revenue for states with income taxes and the District of Columbia.

10.D.III – License Fees:

License fees are collected by state government for a variety of activities. States collect license fees from businesses and individuals who incorporate within their borders. Businesses usually identify states with low incorporation fees (for example, Delaware and Nevada charge minimal fees) to reduce their costs of operation. Fees may also be collected for use permits for hunting and recreation in state parks. License fees are the third largest source of revenue for the states in total. License fees are usually “visible” only to those individuals and corporate entities that are required to pay them. Nevertheless, the cost associated with the fees, particularly in the case of business-related license fees, generally are passed on to consumers in the form of higher prices. License fees associated with hunting and outdoor recreation may be more visible to individuals, but only to those individuals interested in hunting recreation in particular locations. In regards to sustainability, license fees can be used to encourage certain types of business and recreational behavior deemed beneficial to states and communities; at other times, license fees may actually drive away business development needed for sustainable economies or encourage overuse of state recreational areas, producing environmental degradation. Fees associated with water use and recreation are of particular importance in this regard, and many sustainability efforts are aimed at the strategic imposition of fees that promote conservation of natural resources.

10.D.IV – Corporate Income Taxes

Corporate income taxes are another important source of state revenue. Business development and retention is a key element in developing a sustainable economic base. Businesses provide jobs to individuals, which in turn help finance other aspects of local economies. Businesses also contribute to other forms of state revenue, such as license fees. In order to attract and retain businesses, state corporate income tax rates must be competitive with other states and communities. If tax rates are too high, corporations might find it more lucrative to relocate their corporate offices and manufacturing facilities elsewhere. In many cases corporations find overseas locations more economically beneficial because corporate income tax rates typically are very low. Many states in the Northeast and California in the West have relatively high corporate income tax rates — some in the range of 7% to 9%. The highest state corporate income tax rate in 2015 was found in New Hampshire, 9.3%. The lowest state corporate income tax rates can be found in several Midwestern and Western states. Most American states that have corporate income taxes impose flat rates. A flat tax is a single rate regardless of income level.

10.D.V – Severance Taxes

Severance taxes are tax payments imposed on the extraction of natural resources. States own sub-surface mineral rights, some own forestlands, and many protect fish runs through their ownership of surface waters. When natural resources are extracted through activities such as mining, timber harvesting or fishing, the states can collect excise taxes on earnings derived from those activities. From a rights-based perspective, the state collects on resources that technically belong to all citizens. The tax money collected represents a portion of the price the state is charging extractors for the resource; viewed that way, severance tax rates illustrate the very low price private enterprise pays for rights to natural resource.

High quality, well-protected, and readily accessible natural resources are key factors in maintaining sustainable states and local communities in many areas of the country. Unless the resources in question are renewable, the extraction of resources could represent a decline in sustainability potential. Hydrocarbon fuels are destroyed through combustive processes, making them non-renewable as energy sources; and while use of these resources is not a sustainable practice, hydrocarbon fuels remain the foundation of the world’s energy portfolio. Technically, fisheries and timber are renewable resources, but due to restraints on habitat (for example, hydroelectric dams blocking salmon runs) and aggressive timber harvesting, these natural resources require the collective aid of humankind and the power of government regulation and planning in order to retain or regain levels of sustainability. Additionally, the viability of plant and animals communities may be compromised during the process of resource extraction by mining, fishing, and timber harvesting.

In the now famous case, Northern Spotted Owl v. Hodel 716 F. Supp. 479 (W.D. Wash. 1988), U.S. District Court Judge Thomas Zilly decided in favor of the preservation of an endangered species over the continuation of intensive timber harvesting, particularly old growth timber. The case represents a landmark decision that illustrates a governmental commitment to sustainability and the active pursuit of social and environmental justice through governmental action. This federal court decision has had a widespread impact on state and local governments throughout the country. This decision made it clear that the pursuit of sustainability entails much more than the sustainability of a regional lifestyle and the continual meeting of societal demands for resources and products. Rather, human needs and wants must be understood in the context of a broader view of ecological sustainability, not solely constructed as a zero-sum game in which the natural environment loses while human society gains. The court’s interpretation of the Endangered Species Act as seen in the Spotted Owl decision dictates that those extracting natural resources must consider more than profit. Severance taxes go a small way towards the recognition of the environmental loss associated with many forms of resource extraction. Additionally, the taxes levied in this area raise the price of resources extracted, accounting for the hidden costs associated with the reduction of environmental degradation and reducing the demand for non-renewal natural resources.

10.E – Revenue: Past and Future

Spending is up in state and local government,3 nonetheless revenue streams are tightening. How is this seemingly imbalance possible? Good revenue streams exist, but balancing concerns for equity and sustainability is a key aspect of sustainable budgeting. In the past, property taxes and income taxes were highly touted methods of revenue generation.4 In recent decades, however, the property tax has come under severe political attack. In 1978, California voters passed a property tax limitation measure known as Proposition 13 that severely constrained the property tax as a revenue stream for state and local government in that state. In the decades since the passage of Proposition 13, voters in several other states have supported tax and expenditure limitation measures (TELs), resulting in decreased reliance on “broad based taxes (specifically property taxes).”5

Primary reliance on the income and sales taxes persists in the American, but questions of equity remain. Elderly and low-income individuals, for instance, may be unduly burdened by income taxes.6 Sales tax rates have risen and in many cases rate increases have been linked to specific program needs, such as the building and the maintenance of transportation infrastructure. In their study of California taxes, Crabbe and his associates conclude that citizens may find tax rates and increases (specifically sales tax rates) acceptable if taxes can be clearly linked to specific program benefits.7 Arguably, this finding is largely consistent with a more market-oriented society wherein individuals have become accustomed to think in terms of specific expenditures for tangible products.

With respect to predictability, it must be noted that both sales and income taxes are closely tied to economic cycles. The rise and decline of the tech bubble left some state and many local government revenue streams in a rather precarious situation at a time of great need. State budget processes have generally adjusted to revenue instability by tightening up spending commitments8 and through the artful display of political leadership. Government’s demonstration of fiscal restraint as a timely action and government accountability as a priority are examples this political leadership. Former Arkansas Governor Mike Huckabee [a candidate for the Republican Presidential nomination in 2008] argued that political leaders must make citizens aware of fiscal constraints and their impact on budget choices.9 Making empty promises about budget inclusions only sends false signals to citizens about governments’ ability to provide services in times of financial stress. Sustainable budgeting requires honest and open government and thoughtful leadership alike.10

Despite recession, the longer-term future may not be unduly grim with respect to government revenues; nonetheless, state and local government budgeters will need to make tough decisions regarding the three Es of sustainability – a vibrant economy, a healthy environment, and the active promotion of social equity.11 Writing during an earlier period of fiscal constraint, the proponents of reinventing government David Osborne and Ted Gaebler called upon state and local government leaders to become more entrepreneurial in their search for revenue and the operation of their agencies, to look for bargains in their acquisitions processes, and to experiment actively with new methods and techniques of governing.12 Budgeting in today’s challenging times calls for the same level of pragmatism, being realistic about revenues, expenditures, and the needs of citizens.13Revenue management in state and local government also entails making good investments. Osborne and Gaebler’s model for budgeting during tough economic times shows the importance of concentrating spending in areas that produce future revenue, but that type of prioritization might cause some pain and inequity in the short run.14 In another model of budgetary allocations in times of highly constrained budgets, Bowen and his colleagues found that budgetary expenditures (“investments”) made in urban areas produced a greater return on investment than similar investments made in rural areas.

Revenue collection and management in state and local government is more than simply fine-tuning a tax system — it is also about enforcement. State and local government systems operating under fiscal stress must strive for efficient and effective tax enforcement and debt collection. Enforcement may be easier today than in the past given the advent of electronic banking and financial transactions. Former Nevada State Controller Kathy Augustine, as with her counterparts in other states, found during her term of office that the use of information technology in tax enforcement was highly effective.15

One major revenue stream for state government comes from the 1998 tobacco settlement. One element of the The Master Agreement requires that “U.S. tobacco companies… pay approximately $229 billion between 1999 and 2025 to 46 states, the District of Columbia, and five U.S. territories.”16 Johnson found that states are using the tobacco settlement monies primarily for health care, education, infrastructure projects, and as the basis for debt issuance. Nevertheless, state budget makers consider this funding a short-term fix to any future revenue problems — 2025 is no longer on the dim horizon. As a slack resource, the tobacco settlement monies could serve as an important part of the public policy innovations necessary to build sustainable governance. Slack resources have been shown to have a positive effect on the budget process and on achieving favorable outcomes.17

10.F – Federal Grants-in-Aid: A Key Source of Revenue

Federal grants-in-aid are transfers of governmental revenues from the national to state and local governments. There are a variety of types of federal grants. Categorical grants entail funds given to the state and local level for the accomplishment of specific purposes specified in federal statute and enumerated in considerable detail in administrative rules. When the federal government offers categorical grants to state and local governments, the federal government expects goals to be accomplished and attendant conditions to be maintained in the course of work being done (e.g., workplace safety standards, the use of prevailing wage rates, nondiscrimination in hiring and in workplace treatment, etc.). In contrast, the amount of federal grant money available to a state or local government in a formula grant is not tied to goal accomplishment, but rather is dependent on the population of individuals living in the recipient state or local government who qualify for a benefit or service to be provided by the state or local government involved.

As with categorical grants, formula grants are usually given to a state or local government to accomplish a national policy goal adopted by Congress. Categorical and formula grants are usually directed towards specific state and local units of government facing particularly difficult policy dilemmas (e.g., high incidence of domestic violence, the presence of endangered or threatened specifies, a high level of incidence of infectious disease) or are widely available to all state and local governments willing to make an effort to address a public problem (e.g., conduct a hazardous material in transport study for emergency management planning, promote the recycling of waste materials, etc.). Alternatively, competitive grants require that state and local governments demonstrate their need for resources as well as develop innovative policy proposals for how a national public policy goal would be addressed in a favorable way if the requesting government was awarded the grant monies.

Unlike competitive grants, block grants do not require a state or a county or municipal government to follow strict grant guidelines in policy development or implementation. Rather, grant recipients exercise a great deal of discretion in establishing policy goals and developing innovative implementation strategies. The goal of block grants is to provide seed money for the development of local government policy innovations. While block grants have the potential to be misused and wasted, they have been used to great benefit to promote sustainable community development, globalization of the economic processes, and mediation of the effects of global climate change.

10.G – Federal Grants for Transportation

Beyond doubt, sustainable communities will require more energy-efficient modes of transportation. The cost of fossil energy is high and vehicle emissions are a growing concern for climate change phenomena. Renewable energy and hybrid vehicles face escalating demand and short supply. Mass transportation systems might be one very important method of reducing demand for fossil energy. Alternative energy mass transportation vehicles are becoming increasingly visible in society — natural gas and clean diesel-powered buses are now quite common across the nation. Similarly, cutting-edge hydrogen powered buses are part of several mass transportation demonstration projects in the U.S., and in several cities abroad. Nevertheless, it is fair to say that federal transportation-related grant trends would seem to provide more support for a tenuous status quothan promote more efficient and sustainable transportation schemes.

For leaders and administrators functioning at the state and local level, sustainable transportation requires grassroots policy innovation and funding. Many states have instituted their own transportation and energy initiatives to counteract the rather tepid commitment of the federal government to support transportation policy renewal through grants-in-aid. Also, rebuilding city centers and developing high concentration housing units, such as condos, may increase use of public transportation and bring about subsequent reductions in reliance on the personal automobile.

10.H – Federal Grants for Education

Education grants have risen steadily since 1990. Money for education workforce enhancement and training has risen most noticeably; in large part these grants have resulted from the increased emphasis on teacher quality and retention. Education and social services funding has increased in response to new awareness of the relationship between educational achievement and social conditions of student learners. Federal funding for special education and the education of the disadvantaged is a significant portions of the federal funds transferred to states and local governments in the form of grants-in-aid. Noticeably, money for school building improvement has declined, despite increased awareness of classroom overcrowding and school building disrepair. School building infrastructure grants are not only an important part of current education quality, but they are also critical to the sustainability of public schools as a core element of civic infrastructure.

10.I – Federal Grants for the Least Advantaged — Public Health and Income Security

Federal grants for public health services for the least well off in society are critical in efforts to create and maintain sustainable communities. A community’s level of success or failure depends on the achievement of both individual and collective goals. While individual goals may be highly varied, collective goals are defined by what we share in common and our common responsibility to one another. Recognition of our collective commitment legitimizes the social contract to which we have agreed.

Our commitment to the most needy members of society is and always will be a work in progress, as we learn more about the nature of our society and the social ills shaped by demographic, socioeconomic, political, and even environmental change. In dollar terms alone, the chart above illustrates our growing commitment to serve the needs of the least advantaged. Since 1990, the federal grant commitment has more than quadrupled, and will likely rise even more significant in the years ahead. While a strong commitment is noteworthy, federal grants-in-aid will continue to be necessary as states and local communities struggle to establish sustainability along multiple dimensions.

10.J – Federal Grants for Children, Families, and Veterans

The chart above places a number of program areas into comparative terms for an important reason. We believe that the comparison featured is across groups of individuals in our society who are among the most vulnerable and yet critically important to our social sustainability. Commitment to caring for children, families, and veterans represents a core value in American society. While all dimensions of sustainability will ultimately require “commitment,” it struck us as a unique opportunity to illustrate in one table some of the most recognizable examples of commitment!

Commitment to children and families has risen enormously since 1990. While some might applaud the growing commitment, it also signals something else — as with all the other charts discussed previously in this chapter — it signals critical disparities in our states and local communities that American society, through private actions, public policy and budgetary choices, has determined must be overcome if sustainability is to be achieved. The decline in Temporary Assistance to Needy Families (TANF) in terms of grant funding might in part be explained by the success of President Clinton’s collaborative efforts with a Republican congressional majority to hammer out welfare reform provisions; those reforms resulted in moving many individuals off of welfare rolls and into the workforce. Alternatively, it has been argued that TANF and welfare reform has resulted in an ebbing commitment to families18 — the decline in grant funding started shortly after Republicans regained control of both chambers in Congress in 2003.

Federal grants for veteran’s programming at the state and local level has been flat for several years, despite the rise in the number of disabled veterans resulting from warfare in Afghanistan and Iraq. Veterans of the Second World War, Korea, Vietnam, and the Persian Gulf War eras have been joined by veterans of more recent military commitments arising from the Global War on Terrorism. Rather incredibly, federal grant monies have remained rather steady in nominal terms — and if inflation were factored in, the amount of grant money being provided for veterans’ programming is actually declining in real terms.

10.K – Federal Funding for Programs of Hope and Corrections

Again, we have placed in comparison a number of federal grant areas that often impact young adults who find themselves in trouble with the law. How youth are treated is a significant factor in community resiliency; each generation in a community must achieve progress and improve its performance in order for its community to be sustained in the context of ever-changing global, regional and local conditions.

The program funding in the chart above shows our commitment via federal grants to programs that are intended to deal with such issues. As can be seen, the commitment to most of the program areas began to decline in the early years of the 21st century. The one program area that has not declined pertains to funding for vocational and adult education.

Federal grants are important sources of revenue indeed, and many of these grants contribute directly to economic vitality, environmental protection and social equity. The federal revenues provided in these grants are often attached to national policy goals, and this connection to goals gives us some ability to make comparisons over time between grant efforts made and goals being accomplished. Funding for many policy areas is on the rise, but in some cases funding is either stagnating or even declining. While federal grants to state and local governments are very important to our discussion of budgeting and sustainability, it is equally important to explore independently the budget expenditures of state and local governments.

10.L – State and Local Budget Expenditures

Budget expenditures are a good way of determining the priorities of state and local governments. In looking at total state budget expenditures (Figure 10.8), it is clear that education and public welfare represent over one half of state budget expenditures. The third most common expenditure is for Insurance Trust funds, an allocation that covers public employee retirement benefits and private sector unemployment insurance. Highways and bridges and health/hospital expenditures also constitute large portions of state government expenditures. All other functions of government — for example, law enforcement, corrections, courts, natural resource management, and utilities — are covered by less than one quarter of the total state budget expenditures. The area of Veterans’ Services garners only the tiniest of fractions of total state budget expenditures.

As with state governments, local government expenditures are predominantly focused on education expenditures. Approximately one third of total local government expenditures in the United States are spent on elementary and secondary education. Public assistance expenditures are roughly one quarter of local government expenditures, while allocations to Insurance Trust funds are between 15-20 percent of total local government expenditures. A little over a quarter of local government expenditures covers all other government services — for example, fire, parks and recreation, and criminal justice (courts, jails and law enforcement).

In both state and local governments, public assistance and education are by far the biggest expenditure categories in public budgets. In terms of sustainability, education represents a direct investment in the future. With the proper education, tools, technology and knowledge, a new generation could be better prepared to deal with the challenges of the future than past and current generations. For example, the adoption of renewable energy sources requires that citizens understand the bigger system of energy generation, distribution, and use. Through local communities, well-educated citizens will have to make wise choices about energy supply and demand. Education is also a key ingredient in government and private sector innovation. Future quality of life will rely heavily on new knowledge and scientific breakthroughs.

As with education, the area of social assistance consumes a significant portion of the state and local tax dollar, as well as intergovernmental transfers (frequently in the form of grants) coming from the federal government. A sustainable society promotes social justice. A tenant of social justice is that society and government actively address the socioeconomic disadvantage. A horizontally divided society — a society in which a small group of individuals controls a large proportion of available resources while a large number of individuals have little or no access to resources — is not a sustainable society. The horizontally divided society, particularly a society facing near term shortfalls of basic energy and natural resources, will prove to be politically and socially volatile and could even lead to disarray. Social assistance programs represent a commitment to addressing such inequities, and preventing social and political conflict.

It is very clear that many important categories of expenditure associated with sustainability — categories related to natural resource protection, environmental protection and basic infrastructure maintenance – tend to be overshadowed by the education and social assistance functions. Commitment to funding those who have suffered in personal efforts to protect us — the veterans of our wars — is paltry compared to other functions of government. Is the commitment to fund these items that tend to be overlooked important to sustainability? The answer is an emphatic, “Yes!”

10.M – Budget Reforms

Over the years, state and local governments have tried to use various techniques to manage expenditures more effectively while accomplishing goals related to good governance. In many cases, budgetary techniques have been driven by partisan politics, and these techniques have proven to be myopic in design and self-limiting in execution.19 At times, attention has been focused on the input side of budgeting — essentially, tightly controlling agency spending as a method of increasing efficiency in the budget process. Spending control has been attempted through state-level debt limitation measures and the use of the executive line item veto. At other times, some states and local governments have focused on the output side of budgeting — through control of public spending. Finally, the methods by which services are delivered have also been related to the budget process and the promise of more efficient and effective budgeting and related policy outcomes.

Debt limitation measures are commonly found at the state and local level. Most states20 and virtually all-local governments require that annual budgets be balanced. Revenue in balanced budgets could be in the form of tax revenue or revenue from bond issuances. Both forms of revenue are monitored and approved by state and local governments. Debt issuance limitations prove to be very important in maintaining a long-term rational budgeting process.21

Another method of controlling the input side of budgeting is the executive line item veto. We often hear about the line item veto in terms of presidential politics. Presidents have requested a long-term solution to the budgeting process that would result in line item veto authority. The line item veto is often believed to be a solution to out-of-control wasteful spending habits. In a study of Georgia’s line item veto, it was found that the executive power was often not used for the purpose of removing spending categories.22 Instead, Georgia’s governors have used the power to influence the construction of budget documents. Interviews with former governors, such as President Jimmy Carter, find that the threat of line veto is more common than the actual use of the power in the budget process.

Performance-based budgeting is an important part of connecting expenditure to outcomes.23 Performance-based budgets link requests for resources with documentation illustrating the outcomes of budget choices made in previous years. If sustainability is to be attained under budget constraints it will be necessary for budget writers to understand how efficiently and effectively expenditures are at accomplishing stated goals. Since the budget process is cyclical and iterative, good information about outcomes in the previous budget cycle can lead to informed budgetary decisions in future years. Performance-based budgeting is most commonly found in bureaucratic agencies or related to a specific program. All-encompassing performance evaluations are not as common in the U.S. states.

Performance budgets are potentially critical to long-term sustainability goals despite the significant amount of time and effort necessary for their preparation. Documentation on previous performance must be linked with previous expenditures, and then tied directly to justifications for future expenditures. As with all budgeting techniques, performance-based budgeting remains a work in progress. However elegant it may be in its current form, this budgeting practice will always need to be improved because policies, circumstances and budgets are constantly changing; this dynamism is especially true for sustainable communities. In numerous American cities24 and state governments performance-based budgeting is being attempted, with only mixed results being documented to date.25 In recent years, performance-based budgeting has waxed then waned in popularity, and is currently in a stage of witnessing renewed interest.26

Finally, the contracting out of government functions is frequently hailed as a method of reducing costs and creating better public sector budgets. Contracting out means that private sector providers are paid to accomplish certain government functions and the government discontinues its direct delivery of services. Irene Rubin concludes that contracting out cannot be equated with better budgeting because contracting authority and costs are oftentimes hidden within program or agency budgets and are largely invisible to most decision makers.27 She suggests that contracting should become a budget line independent of agency or program general funds; in this way contracting out would become more visible and its outcomes would be better understood.

10.N – Sustainable Budget Focus: Five Key Areas of Future State and Local Budget Needs

The traditional budget categories discussed previously will continue to consume much of state and local budget revenues, but a sustainable future will require a continued and likely stronger budget commitment to growing areas of need. Projecting need is a tricky business because so much about the future remains unknown to us. Nevertheless, it is a fairly safe bet that the following five categories will require substantial increases in state and local budget commitment soon and for the foreseeable future:

10.N.I – Alternative Energy Sources & Energy Conservation

It is projected that “peak oil” will occur within the next fifteen years — that is, if it has not already occurred. Towards the end of the 21st century, much of the globe’s accessible petroleum will have been depleted. Reliable access to energy is a prerequisite for the modern society and key to sustainability. Alternative energy will likely be produced using a variety of methods. So-called “4th Generation” nuclear energy is very likely to play a significant role in electricity generation, as is thermal energy generation. Fossil fuel-based energy sources will continue to be harnessed in the form of coal and natural gas. Renewable energy in the form of solar electric, solar thermal, wind generation, ocean thermal energy conversion, tidal generation, and geothermal will be used to provide a sizeable portion of state and local energy needs in future years where state and local governments have access to those sources. As we near a time when greenhouse gas emission restrictions and carbon sequestration will become common terminology, the development of locally-suited alternative forms of renewable energy will be priority concerns for American state and local governments. Sustainable communities will require significant participation from state and local government in the form of financial commitments to public-private partnerships and tax incentives for the development of alternative energy systems that will contribute to community sustainability.

10.N.II – Climate Change Impacts

Significant climate change impacts are projected to occur within the next few decades. Depending upon the location of a community, climate change may lead to rising ocean levels and flooding, severe heat and drought, increased extreme weather behavior, and more frequent range and forest fires – to name but a few possible adverse climate-related phenomena. The widespread destruction witnessed along the Gulf Coast produced by Hurricanes Katrina and Rita; the multi-year drought in the early years of the 21st century impacting the South; and devastating wildfires in California and other Western states have all been attributed to climate change. Preparing for highly probable and disruptive climate-related events is a key part of the pursuit of sustainability and community resiliency, and such preparation will require significant budget resource commitments.

Climate change studies frequently tie back to the issue of carbon emissions from fossil energy use. The development of alternative energy, as discussed previously, is an important part of meeting future energy demands, but it is also beneficial in terms of reduced carbon emissions into the atmosphere which lead to ozone depletion.

10.N.III – Infrastructure Renewal

Infrastructure renewal is a multi-faceted phenomenon. Tremendous resource commitments are required just to maintain current infrastructure. In the long run, commitment to maintaining infrastructure is less costly than neglect and subsequent failure. For example, in 2007, a major urban highway bridge collapsed in Minneapolis-St. Paul, Minnesota killing and injuring many citizens. The bridge collapse opened a policy window,28 and brought the issue of U.S. infrastructure renewal to the national, state, and local policy agendas. It is estimated that hundreds, if not thousands, of the nation’s highway and road bridges may require substantial retrofitting or replacement if we are to avoid a repeat of the Minneapolis experience.

In addition to this long-neglected problem, it is very likely that the suburban sprawl of U.S. cities, and the long commutes to and from work that are associated with this sprawl, are not sustainable. It may well be the case that infrastructure renewal may require a commitment to re-design as well as selective renewal. Rising energy costs may likely affect residential choice and give rise to the need for new forms of transportation infrastructure in American population centers.

Beyond roads, many government buildings such as schools, administrative offices, and corrections facilities are aging and beginning to show signs of disrepair. The technology available in these buildings is often insufficient to the needs of e-government and effective data management, analysis, and transfer. Older buildings frequently “leak” thermal energy, as well as entail the inefficient use of electricity due to poor use of natural light. Sustainability means investing in upgrades and making a sincere commitment to good (“green”) design and timely maintenance.

10.N.IV – Bio-Equity

Bio-equity calls for equal treatment for both human society and other elements of the “biosphere,” and acting on a commitment to building communities that do not develop at the expense of the environment in which they exist. Understanding and mandating bio-equity through regulation may have begun with the National Environmental Policy Act (NEPA) in 1969 and the passage of the Clean Air Act, the Clean Water Act, and the Endangered Species Act, but has been interpreted and has evolved on the local level to encompass more.

10.N.V – Technology and Innovation

Sustainable communities will manifest lower demands for transportation corridors and transport infrastructure if technological development and communications innovation continue into the future. Public-private partnership commitments to the promotion of new environment-regarding technologies will make resource use more efficient, creating well-paying jobs while simultaneously reducing the relative cost of living. For example, it is possible that many of the industrial manufacturing jobs of the future could be completed from home computers managing robotic systems on a distant factory floor. In fact, much of the technology needed to expand these systems is already readily available; a budgetary commitment on the part of government might speed the process towards more widespread use of these technologies. And, of course, what the long term future holds in the way of related communication technology innovations will likely only bring us closer to sustainable communities.

10.O – Budgeting and the Core Dimensions of Sustainability

Budgeting establishes or formalizes communal or individual priorities. Accomplishing goals within the core dimensions of sustainability will require effective budgeting. Budgeting for sustainability is not a one-time event — within the sustainability paradigm, circumstances evolve and priorities change due to increased understanding and changing preferences. The social objectives of sustainability, for instance, will change as demographics change. As the Baby Boomer generation fades into history, a new demographic will likely emerge — a more youthful, more energetic, more mobile, and more diverse society lies ahead. Investing in human capital will become more complex as traditional transmission of human capital within traditional family units becomes less common and as the changing educational needs of a mobile workforce become increasingly evident. Traditional perspectives of social capital — e.g., lifelong commitment to civic institutions in particular communities — continues to decline and is replaced by non-profits that draw youthful participation and which change as times and conditions change. Budgeting plays a big role in the ever-changing sustainable communities, offering tax incentives and grant resources to help support the public welfare, education, and community needs of a future society.

As with the social objectives of sustainability, economic objectives can be encouraged or discouraged through the state and local government budget process. Tax incentives to sustainable industries encourage growth of new green economies, while restrictive tax codes might discourage polluting or non-sustainable industries. In creating equitable market conditions and reducing economic disparity, budget resources in communities built around the sustainability paradigm will likely offer a helping hand to the least benefitted members of states and the poorest local communities through redistributive policy.

Environmental objectives are advanced through budgeting for environmental regulation. The sustainability paradigm will require that state and local government strictly regulate polluting industries and products. Regulation, however, requires a strong and well-financed bureaucracy that monitors environmental quality and ensures industry and broader community compliance.

Finally, the institutional change needed to advance the sustainability paradigm will most likely occur if clear priorities are established through the budgeting process. Agencies and policy objectives that are of higher priority can be bolstered through a strong financial commitment on the part of budgeters. Social welfare, education, and environmental policy agencies and policies, for instance, would likely receive even greater financial assistance. In the future, particularly when the health and welfare costs of the large Baby Boomer generation have faded, budget resources will likely shift in new and different directions to meet the evolving objectives of sustainability.

Exercises

Budgeting — What Can I Do?

As we are writing this book state and local governments are climbing out of the Great Recession of 2008-2009 budget shortfalls and restoring the funding of many agencies and programs. As we have discussed in this chapter, budgeting in good times can be a complicated process let alone in times of severe fiscal stress.

Learn how your state compares to other states’ tax rates, tax burden, and tax sources at the Federation of Tax Administrators website:

10.P – Conclusion

Sustainability requires commitment. Commitment, however, is only a word of promised future action; it means very little of consequence until acted upon. Analyzing public budgets is a very critical method of determining what we mean by commitment, and determining how that commitment ties into the issue of sustainability at the state and local level. Through our analysis of budgeting in state and local government, we found that commitment requires the expenditure of considerable resources over time. The resources in question will come from a variety of sources both internal to and external from state and local government, and sustainability requires the development of reliable and non-injurious resource bases to support the programs and policies required to meet the needs of the private sector and civil society. While the needs to be addressed are many and the challenges facing us are rather daunting, the resource base available to state and local governments is likely to be relatively constrained for quite some time into the future. The challenge for the accomplishment of sustainability in state and local government in the years ahead may have less to do with resource provision and much more to do with strategic spending choices. In terms of sustainability, the “healthy” and resilient community relies less on the size of its tax base and much more on the wise spending and budgetary vision featuring the balanced pursuit of economic vitality, environmental protection, and social equity.